With foreign institutional investors (FIIs) withdrawing nearly Rs 82,000 crore from India this month, a flood of IPOs and QIPs sucking up liquidity, and no support from a sluggish earnings season, the festive month of October is shaping up to be the worst for Dalal Street since the Covid-led market crash in 2020.
The Sensex is down about 5% this month (until Wednesday), surpassing June 2022's record drop of 4.58%. One of the worst market losses in recent years occurred in the February and March months of Covid year 2020, when the Sensex fell 6% and 23%, respectively.
With significantly bigger losses in the broader market, the entire market valuation of all equities listed on BSE has decreased by Rs 29 lakh crore in the month.
"A crash is unlikely in the current environment because domestic liquidity is strong enough to support the market during declines." However, a correction is certainly likely, and we are currently witnessing one, spurred mostly by continuous FII selling," said Dr. VK Vijayakumar of Geojit Financial Services.
The selling by FIIs has been the largest dumping by foreigners in a single month, well beyond what occurred during Covid.
Whether one calls the 'Sell India, Buy China' trade a short-term tactical trade or a structural one banking on a Chinese rebound, the FII drain from Indian equities would have been less severe if Dalal Street had not traded at such high valuations.
Things only got worse during the Q2 results season, which showed rather weak underlying growth across sectors.
Furthermore, large IPOs such as Hyundai India and fund-raising by promoters via the QIP method are emptying investor coffers. On the other side, international concerns and uncertainty over the outcome of the US election next month are causing some investors to remain cautious.
Earnings growth is expected to slow to around 10% in FY25, compared to an excellent 26% in FY24. In Q2, the Street forecasts Nifty-50 businesses' EPS to improve by only 2% year over year.
Amid target price drops by numerous businesses that missed projections during the recent earnings season, Goldman Sachs has downgraded Indian equities to neutral from overweight, citing high valuations and a less supportive backdrop that could limit the near-term potential.
Analysts at InCred Equities have also reduced their Nifty objective by 3% to 25,978, predicting that the decline would continue into the December 2024 quarter as expensive valuations undercut risk.
However, FY26 profits growth is expected to rise, and the market may recover if clarity on this earnings rebound emerges, according to Dr. Vijayakumar. Many believe that the present decline is exaggerated, with little possibility of a dramatic trend reversal.
"The markets are progressively becoming oversold, and I don't expect more than a 2%, 3%, or 4% drop from here, although the upside potential is as significant. So, this is an opportunity to seize rather than think about in the short term," said Gautam Shah of Goldilocks Premium Research.
According to fund manager Gurmeet Chadha, because a big portion of the correction is due to non-India factors, the recovery will be swift, which is why it is critical to invest in areas with near-term profit visibility.
"Corporate balance sheets are deleveraged, our economy is rather strong, and despite this, we have not seen a 10% correction in a long time. Corrections are normal. Any correction is unsettling, but this one is particularly unsettling because it occurred so abruptly," he added.
